IRS Amnesty on Employee Misclassification: Things to Consider

If your company has misclassified employees as independent contractors, you have a chance to correct the issue — and pay a reduced penalty or fine — under a new IRS program, the Voluntary Worker Classification Settlement Program, or “Fresh Start” for short.

Although eligible employers can obtain substantial relief from federal payroll taxes, penalties and fines as long as they voluntarily change the status of misclassified workers, they may still owe state payroll taxes and unemployment contributions for the entire period. Also, coming clean doesn’t relieve you from potential misclassification issues regarding federal wage and hour laws, state-tax laws or other protections an employee might have through their employer’s handbook according to Michael Aitken, vice president of government affairs for the Society for Human Resource Management.

The program also subjects employers to future payroll-tax issues for six years, as opposed to the normal three-year statute of limitations.

If you’re interested in seeking amnesty under Fresh Start, here’s the list of requirements from the IRS website.

Applicants must:

Consistently have treated the workers as nonemployees

Have filed all required Forms 1099 for the workers for the previous three years

Not currently be under audit by the IRS

Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers

It’s your choice. But remember, you’ll have to pay the full boat if the issues are discovered during a random IRS audit.

One Response to “IRS Amnesty on Employee Misclassification: Things to Consider”

Leslie’s blog post hits many of the issues, but there are a number of viable and achievable alternatives that many businesses are undertaking to eliminate or minimize exposure to misclassification liablitity: bona fide restructuring, use of staffing companies, or reclassification outside of any voluntary program offered by the IRS. Those alternatives, and the proprietary tools used to assess the suitability and implement those options, are discussed at http://www.pepperlaw.com/publications_article.aspx?ArticleKey=1769 and in a number of blog posts in http://www.IndependentContractorCompliance.com.
Richard Reibstein (reibsteinr@pepperlaw.com).